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OPEC's Algiers Session: A Pipe Dream

OPEC members will meet in Algeria on Sept. 26-28 for a second emergency meeting this year to discuss ways to ease the global oil glut and push up prices that are locked way below their highest levels in two years. But one may ask what really has changed from the rush meeting in Doha to the Algiers gathering? In essence, not much.

Brent futures traded at $42 a barrel on April 17, the day OPEC and outside producers discussed a plan to freeze oil production in the Qatari capital. The benchmark has hardly kept above $45 over the past week, a marginal improvement after some highs and lows in five months that partially justifies a second informal meeting. But in hindsight, the odds for meaningful measures are not good.

The first attempt ended in vain after Saudi Arabia, OPEC’s top producer, shifted ground in the eleventh hour and pulled out of a freeze deal well within reach because its regional rival Iran said it was not interested.

But what else was done to shore up prices that had just touched their lowest level in 12 years in January? Nothing.

In reality, it was a string of supply disruptions that inadvertently tipped the balance in favor of producers. The shockwave of Doha failure was quickly offset following a strike by Kuwaiti oil workers over low wages that temporarily curtailed the country’s crude output to one-third from nearly 3 million barrels per day.

A wildfire in Canada, militant attacks on Nigeria’s oil infrastructure and the battle of Libya’s rival factions over its oil export terminals further eroded the oil glut.

In a report published on Sept. 7, the US Energy Information Association put the total unplanned OPEC and non-OPEC outages in August at 2.8 million barrels, including a 1-million-barrel drawdown in Libya’s output and 700,000 bpd in Nigeria.

Meanwhile Saudi Arabia and Russia—the world’s top producers—are relentlessly pushing their crude production to the limit and seem to continue to let the world drown in more oil, and mostly their oil. With a combined output of over 20 million barrels a day, the kingdom and the Kremlin produce more than a fifth of the world’s crude oil.

After reports on the gathering in Algeria, oil market’s biggest players have been conspicuously riding on sentiments while proving inept, or unwilling, to fix the fundamentals.

In what appeared to be a ceremonial move in the lead-up to the Algiers meeting, Saudi Arabia and Russia announced plans to establish a taskforce to regulate the oil market, but stopped short of detailing the initiative.

Khalid al-Falih, Saudi Arabia’s oil minister who replaced long-serving Ali Al-Naimi just over four months ago, said in August that an oil output freeze deal would be “positive”, adding that “we are willing to listen to our colleagues on what they have to offer”; that says a lot about the kingdom’s strategy.

Feeling entitled to their bloated market share, the Saudis expect second-tier producers to pick up the slack and make room for their record-shattering oil output; something that looks highly unlikely, at least for now.

Iran, which is emerging from punitive international restrictions that significantly axed its crude production and export, rightfully wants to retake the ground it lost to rival producers when sanctions were in place. OPEC’s No. 2 producer Iraq has also been insisting on long-term plans to boost crude production from the current 4.6 million bpd.

Meanwhile, higher-cost oil producers in the US and elsewhere are bringing back rigs as they continue to adapt to low prices, compounding a market awash with unwanted barrels.

For Saudi Arabia, the man in charge has changed but not the policy. This week, the International Energy Agency said that Saudi Arabia has knocked the United States off its perch as the world’s leading oil producer, a record held by the US since April 2014, according to the Paris-based agency.

Oil states are heading into an emergency meeting on the back of fickle verbal agreements and no clear-cut strategy to freeze or cut production. If anything, similar attempts in the past suggest that an effective agreement to restore market balance might be nothing more than a pipe dream for now.